• The USD firmed up last week, and could have made its high for the summer, although we must wait for markets to confirm this. Macro conditions and markets remain weak, and the USD continuing its rally will signal further sell offs in risk assets 
  • CNY has broken out vs the Dollar in a bad way, and is looking to test May’s lows. If CNY continues to weaken vs the USD, expect more selling in global risk assets
  • The US yield curve remains deeply inverted at multiple points, base metals are still weak, and US breakevens remain low 
  • Given how macro markets have aligned over the past few months, we are looking at further, and possibly steeper, sell offs

• USD strength remains broad based
  • Stress levels in USD funding markets are obviously high, and still increasing. Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession is
  • USDCNY is very weak and looking bearish. CNY’s shift, and it being one of the last to weaken vs the USD, heralds a shift in the global cycle, which does not bode well for economic growth and risk assets

• Commodity markets are aligned with the USD and the US yield curve, signaling serious deterioration in global conditions
  • WTI is now trading in the 80s, Aluminum remains very weak, Copper’s bounce may have topped out, and Iron Ore prices are at the cusp of breaking lower

• US 10y and 30y yields have bounced strongly after breaking below key support in early August. However, conditions are lined up for UST yields to fall sharply given global conditions, and how other markets have been trending

Trading Ideas – Performance

Trading Ideas – Commentary

• US long yields have turned, although it remains to be seen if a top has been made. Our long TLT call position is still in the red, but we purchased a year long expiry for this reason, to give the market time to make a top (if it does!)
  • Went long TLT calls with 1 year expiry, as strong bids for USTs look to be on the horizon as the global cycle shifts
  • Stronger USD, with significantly weaker CNY, is a huge warning signal
  • Re-inverting yield curve, plummeting breakevens, base metals breaking lower, and now even tumbling oil prices, are all ominous signs

• Stopped out of EURUSD, AUDUSD, and GBPUSD shorts for a profit of 4.14%, 3.92%, and 3.21% respectively
  • Looking to re-enter USD longs again if the trend remains bearish

• Closed the straddle on GLD for a net profit of 115%
  • Decision to straddle gold using GLD options, instead of putting on an outright long position, has paid off handsomely, with gold tumbling down to ~$1700 after failing its retest of 2000

Trading Ideas

• Long USD:
  • Well established trend, in place for >11 months in most major currency pairs
  • Recent sharp increases in the Dollar’s value signals that global economic growth is going to take a turn for the worse. Global USD funding markets will tighten even more, driving the USD even higher
    • US yield curve’s inversion in early April, and mid June (even as the Fed turned hawkish) is a clear warning sign
    • USDCNY has started to move higher rapidly, indicating high levels of stress in global USD funding markets
  • USD longs in general should do well, but of the G7 currencies, look to go long the USD vs:
    • EUR
    • CAD
    • GBP
    • AUD
    • JPY

• Long 10y or 30y US Treasuries:
  • Yield curve re-inversion (2s10s, 5s10s) signals the coming end of the current economic growth cycle, which means that nominal yields will start to turn down soon
  • Monthly & yearly trends in yields are bearish, and looking for an opportunity to short yields is in alignment with long term trends
  • 10y yields have broken below key 2.71% support – keep an eye on whether the breakout is sustained
  • Trade can be expressed:
    • Long TLT, or long TLT Calls
    • Long US T Note/Bond Futures, or long Calls on Futures

• Short Commodities:
  • Short oil, copper, aluminum, iron ore, given that so many macro markets are indicating more macro weakness to come
    • Oil and copper are the most liquid and accessible markets to trade using futures
    • Can express the short oil trade by shorting XLE, or purchasing puts on XLE (see ETF Edge)

Charts for this week’s report can be found in the slides at the beginning of the article.